Putting your money into a savings account affords certain benefits. It offers a safe location for your hard-earned money, which is perfect for when you are saving up for something significant or trying to establish an emergency fund. A savings account opened at a federally-insured financial institution can insure your funds up to a certain amount. And, if you’re short on a deposit, you may be able to find a financial institution that requires no money to become an account holder. The most advantageous characteristic of a savings account, though, may be the interest it earns.
Types of interest your accounts earn
A savings account that is interest bearing can earn two types of interest — simple and compound. Simple interest is what you earn on your original balance, according to Margarette Burnette, writer for NerdWallet.com. It is basically the sum your financial institution, “pays” you for trusting them with your funds.
“You can calculate simple interest in a savings account by multiplying the account balance by the interest rate by the time period the money is in the account,” notes Burnette.
To do this calculation, you’ll need to plug in your beginning balance, the interest rate represented in a decimal, and number of time periods, which, according to Burnette, are usually in one-year designations.
Compound interest is where your savings account can take major strides, especially if you make regular deposits, notes Burnette.
“Compound is interest on your interest, or reinvesting accumulated interest from previous periods,” explains Carol M. Kopp, writer for Investopedia.com. “If you reinvest the interest you earned on your savings account and the initial amount deposited, you’ll earn even more money in the long term.”
The rate of compounding interest can vary depending on the terms of your savings account and the financial institution’s rules. You may see increases on your account from compounding interest every day, each month, or every quarter, Knopp adds.
“The more frequently interest is added to your balance, the faster your savings will grow,” she notes.
Types of accounts with accruing interest
There is a range of savings accounts, each with varying interest rates, available to help your money grow. A traditional savings account gives you access to deposits and withdrawals. According to Jeremy Vohwinkle, writer for TheBalance.com, the trade-off for the convenience is a lower interest rate compared to other account types.
Most online institutions offer high-yield savings accounts. These offer higher interest rates if you are a dedicated saver, but limit the liquidity of your funds, he adds.
A money market savings account resembles a traditional savings account with added bonuses of higher interest rates, debit card, and/or the functionality of checks, says Vohwinkle.
Investment companies issue money market mutual funds and are not insured by the FDIC.
You can also yield interest on your savings when you place it in a certificate of deposit. The only way to reap the benefit of the CD’s interest, though, is to deposit your money and leave it untouched according to the CD’s time restriction, anywhere from one month to 10 years, according to Vohwinkle. If you withdraw your money early, you’ll be subject to a penalty.
Most savings accounts offer you a chance to increase your funds by earning interest. It’s up to you to determine what type best serves your financial needs and goals.